Wage Index Report Issued by Institute of Medicine Affects Medicare Payments to Hospitals

The Facts
The Institute of Medicine (IOM) on June 1, 2011, released a long anticipated report analyzing geographic adjustment factors under the Medicare program, including the hospital wage index and physician geographic practice cost index. This report is the first of two that have been commissioned by the Centers for Medicare & Medicaid Services (CMS) to examine the hospital wage index under the Inpatient Prospective Payment System and the geographic practice cost indices (GPCIs) under the Physician Fee Schedule. The focus of this first report is evaluating alternative methodologies and data sources for improving the accuracy of the hospital wage index and the GPCIs.

The IOM embraced recommendations remarkably similar to those made by the Medicare Payment Advisory Commission in its 2007 study of the wage index, including using Bureau of Labor Statistics data instead of hospital cost report wage data to form the backbone of the wage index. However, IOM departs from MedPAC in a few key respects. First, IOM recommends retaining metropolitan statistical areas (MSAs) as the building block for reflecting labor markets, instead using counties as MedPAC recommended. Similar to MedPAC, IOM also embraces a smoothing technique to eliminate sharp differences in wage index values between areas, but IOM recommends using commuting patterns rather than mathematical formulas, which MedPAC recommended. Notably consistent among these various reports is the proposal to eliminate reclassification processes, which IOM and others reason would no longer be necessary with smoothing.

The IOM report is the latest in a series of wage index reports to be released of late, all of which were generated by health reform legislation. CMS in April 2011 released a report on wage index reform developed by its consultant, Acumen, which recommended using wage and commuting data to define hospital labor markets rather than relying on MSAs.

What's at Stake
Future changes to the wage index, such as those recommended by the IOM, could dramatically increase or decrease Medicare payments to hospitals. While the release of this report is important for informing the discussion of geographic adjustment factors in Medicare payment, it likely will not have any immediate impact. The IOM report and others before it highlight that legislation is necessary to advance many of the recommendations. The Affordable Care Act (ACA) requires CMS to issue a plan to reform the wage index by December 31, 2011. CMS is expected to rely heavily on work previously done by Acumen for this report. Timing for the final report is not yet certain, but is critical. Congress is not likely to act until it gets CMS's report, and even then action will be difficult. Budget neutral action will redistribute billions of dollars, which makes any change politically difficult. Insulating would-be losers from heavy losses resulting from reform could be very expensive, which also makes any change politically challenging.

Steps to Consider

  • Hospitals may re-examine the 2007 MedPAC report to evaluate how the MedPAC proposals and comparable IOM proposals may impact payment.
  • Hospitals also may examine recommendations from CMS's contractor, Acumen, to evaluate potential impact.
  • Finally, hospitals that anticipate significant reimbursement impacts -- positive or negative -- arising from wage index changes, may wish to begin discussing these issues with congressional representatives.